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I'm sure you have learnt some good lessons in this. Refer to Paul's post can't be fixed without sale. Purpose of the funds determines deductibility. What the debt is secured against is irrelevant. If you draw down funds to payout the original funds, it's still the same purpose. The...

What advice did the bank give you, by the sounds of things you wanted to sell and buy a new property. You couldn't show that you could service the mortgage so you chose to transfer your mortgage. The bank shouldn't of been giving you specific tax advice. Did you speak to your accountant before...

Sounds like they couldn't afford the new loan, thought it would be good idea to security substitute but didn't think of the consequences. Potential error by the bank and the OP. OP how much has your serviceability changed? Would have to be a fair amount to go from affording a PPOR which isn't...

Paul I believe this is whats happen. LOAN A used to buy PPOR PPOR sold LOAN A security substituted to TERM DEPOSIT TERM DEPOSIT used to buy IP and LOAN A now secured by IP Therefor IMO it was cash used to buy IP not LOAN A. As LOAN A is and always was used to buy PPOR.

I'm with Terry on this - security substitution should be used for PPOR transfer where there isn't a tax implication. The bank has allowed you to transfer the debt to the new security, but it's still the same loan which was used to purchase the previous property.